The coronavirus pandemic bringing down global demand for oil as well as the breakdown of the production pact between the oil cartel OPEC and Russia and other oil producers earlier this month has crashed global oil prices to its lowest since 2002.
At one point on Monday, the Brent crude fell to $22.58 a barrel which was its lowest since November 2002. On the other hand, the price of the US West Texas Intermediate (WTI) dropped to an 18-year low – falling below and closing at $20 a barrel.
As more and more companies across the world having closed down production temporarily and as travel restrictions because of the coronavirus pandemic severely reduce demand for oil over the past month, the global price of oil has now dropped by more than half.
This situation was exacerbated by a price war between two of the largest oil producers of the world – Saudi Arabia and Russia. This was triggered after Russia refused to agree to a proposal from the OPEC about deeper production cuts. The OPEC and other non-OPEC oil producers including Russia but excluding the likes of the United States and some European producers, had been imposing a planned cut in production since the last three years to prop up global oil prices. Saudi Arabia is the largest oil exporter of the world and the de facto leader of the OPEC.
The fall out between Russia and OPEC took place at a time when oil refiners across the world were processing less crude oil as demand has been drastically reduced by travel vans and travel bans and grounded airlines because of the coronavirus pandemic amid countries imposing lockdowns forcing people to stay back home.
According to analysis, the main factor in the collapse of the demand for oil was the steps taken by governments to prevent and slow down the spread of the virus pandemic.
“Oil prices failed to keep pace, with growing (coronavirus) lock-down measures and reports that this could drive global demand down 20%, potentially pushing the world to run out of storage capacity,” said Morgan Stanley analyst Devin McDermott, citing a forecast by the Paris-based International Energy Agency.
One of the industry sector majorly hit by the collapse of the oil prices were the shale oil producers in the US. This has been the trend since early March. Within the US< there have been growing calls to the government to suspend royalty payment fees from drillers and more purchasing of US oil by the government to fill the US Strategic Petroleum Reserve, McDermott said. There have also been calls to restrict production in some states such as Texas. The US is now the world’s top oil producer.
“Since the 1930s, states have had the authority to limit oil and gas production in order to support oil prices,” McDermott said. “Though this practice is not widely used today, both federal and state regulators still have the ability to place restrictions on production levels,” he added.
(Adapted from BBC.com)